Corona Virus Rearing Its Head, Again
The corona virus has startled the world, again, with the surfacing of a new variant, named Omicron. Investors feel uncomfortable by the uncertainties that come with it, which was reflected in falling equity markets last Friday. We think, though, for several reasons that we do not have to fear for another ‘March 2020’.
Financial markets have entered a phase of higher volatility last Friday. This was triggered by cumulative restrictions imposed in Europe to battle the next wave of Covid-19 and the emergence of Omicron, the new corona variant. It is a variant of concern, as the World Health Organization puts it, as it presents many mutations that could potentially reduce the efficacy of vaccines.
This news made investor sentiment switch within 24 hours. Until Friday, investors were focused on the acceleration of the US Fed tightening in the coming months, triggering 10-year US Treasuries to rise to levels as high as 1.68% on Wednesday, a stronger US dollar and pressure on growth stocks. But then, attention shifted to a scenario with corona variant concerns that could derail a strong recovery, leading to lower yields (1.48% for 10-year US Treasuries on Friday night), a lower US dollar and higher volatility on stock markets. Especially, European equity markets saw a brutal correction, in particular cyclical and value stocks. On Monday morning, risk aversion seemed to stabilize as European markets opened on a positive note, despite a negative session in Asia.
Two Relevant Questions
The next two weeks could remain volatile for as long as investors are waiting for answers on two questions. First, the Omicron variant already seems to be more contagious, but does it also lead to a more severe form of the disease? Second, does it reduce the vaccine effectiveness significantly? In case both answers are negative, the Fed tightening narrative will probably return early next year, as quickly as it disappeared. In case both questions have a positive answer, downside risks will remain for a few weeks, with investors anticipating an economic slowdown for the winter.
In the latter case, however, we do not expect to see high levels of volatility as seen in March 2020 for various reasons. First of all, governments, corporates and households have become used to live with this virus during the last 18 months. Second, laboratories that have produced medications and vaccines could be able to adapt their products quite rapidly. Some companies have already declared that they could offer a new vaccine in a few months. The final reason is that fiscal and monetary tools that were put in place during the last quarters could be – in some cases - deployed again if necessary.
Recently, ABN AMRO decided to adjust the risk/return ratio of the investment strategy by taking the opportunity to rebalance equities back to the tactical asset allocation target –an overweight towards equities - and for the proceeds to be added to cash, considering that the latter could be redeployed when market opportunities arise. Even though uncertainties are increasing, we still consider our position as sensible, as we still expect economic growth to be above trend next year, and able to support single-digit earnings growth. Of course we will continue to monitor markets and return to you if circumstances demand.
Olivier Raingeard
Global Head of Equity Strategy